How Does a Distribution Agreement Work?

In the past, we discussed what a distribution agreement is. In this article, we will discuss how it works.

Just to recap, a distribution agreement is a contract between the supplier and distributor. The distributor has the right to sell the supplier’s goods and services. Usually, the distributor sells to a network of retailers, as opposed to selling directly to the public. Sometimes, the distributor can use the supplier’s intellectual property when advertising. However, distribution agreements must be specifically drafted. Incorrectly drafted distribution agreements have unintended effects. You could end up drafting a perfectly good franchisor/franchisee agreement instead!

Essential Terms in Distribution Agreement

Not every agreement is the same. However, essential terms need including. These terms include:

  • Distribution Territory – where can the goods and services be sold?
  • Distribution Length – for what period can the goods and services be distributed?
  • Exclusivity – is the distributor the only distributor or will there be others, including even the supplier?
  • Obligations – how should the distributor sell the supplier’s goods and services?
  • Price of Goods – the price paid to the supplier for the goods;
  • Payment – cut of distribution profits and how frequently they are paid.

Distribution agreements are sometimes unbalanced. Bargaining power depends on the position and expertise of the parties. Suppliers and distributors have different wants and needs. You need to speak to a lawyer to bargain the best deals.

Here we’ll provide an insight into what a distribution agreement means for both suppliers and distributors.


The supplier is usually the manufacturer of the good or designer of the service. Likewise, suppliers use distributors for a number of reasons. Some of the most common reasons include:

Lack of Expertise

Suppliers may know how to make the product, but have no idea how to sell it. They rely on distributors who have experience and contacts for selling to the community. Distributors also have experience in marketing the product and can make it easy accessible for consumers.


Especially if the supplier has not done retail before, it is expensive to set-up. By relying on a distributor, the supplier can see returns on their product faster by obtaining a percentage of distributor sales.


Although it is possible for a supplier to distribute their own goods and/or services, it takes a lot of time and effort. To conserve their efforts for designing and manufacturing the product, it is often easier to just rely on a distributor.


Distributors do not usually manufacture goods and therefore rely on suppliers for the actual product. They need suppliers for a variety of reasons. Some of these reasons include:

Industrial Capacity

Manufacturers own the factories, machinery and tools needed to make the products or services. Distributors do not own this property and therefore would need to purchase it or hire independent manufacturers. Also, they do not have relations with raw material providers. Therefore, they cannot get good deals and discounts


Distributors do not have the expertise to design products and services in contrast to suppliers. Furthermore, hiring designers is costly.

Intellectual Property

Finally, distributors often start from scratch and must tread lightly. They need to be creative with their designs to avoid possible lawsuits.

Australian Competition and Consumer Act 2010 (Cth)

This Act covers distribution agreements. Even more, suppliers must be careful not to misrepresent their products to distributors. The distributor needs to know exactly what they are buying.

A distribution agreement is a good way to maximise profits, without having to expand into unfamiliar markets. However, they need to be drafted carefully. You need to consult a company lawyer for this.  

Need to know more? Contact a LawPath consultant on 1800 529 728 to learn more about Distribution Agreements and to obtain a fixed-fee quote from Australia’s largest legal marketplace.

Most Popular Articles
You may also like
Recent Articles

Get the latest news

By clicking on 'Sign up to our newsletter' you are agreeing to the Lawpath Terms & Conditions


Register for our free live webinar today!

Price of Justice: Paying the Right Price for Legal Expertise

12:00pm AEDT
Tuesday 30th April 2024

By clicking on 'Register for webinar' you are agreeing to the Lawpath Terms & Conditions

You may also like

You should give careful consideration to what type of agreement you are entering into. Is it a franchise agreement or distribution agreement? Find out here.
Starting an import business isn't as complicated as it seems
Delivery of goods is an essential component of any business agreement. Read more about what this means and its function here.

Thank you!

Your registration is confirmed. Keep an eye on your inbox for an email with details on how to watch the webinar.